If you’re a high income earner, Medicare expects you to pay more for your health care benefits. These premium surcharges or so called Income-Related Monthly Adjustment Amounts (IRMAA) are typically unavoidable but in the final section of this article I address some special considerations for those planning a Roth Conversion.
|Modified Adjusted Gross Income (MAGI)||Part B Monthly Premium Amount||Prescription Drug Coverage Monthly Premium Amount|
|Individuals with a MAGI of $85,000 or less||2015 standard premium = $104.90||Your plan premium|
|Married couples with a MAGI of $170,000 or less|
|Individuals with a MAGI of $85,000 up to $107,000||Standard premium + $42.00||Your plan premium + $12.30|
|Married couples with a MAGI of $170,000 up to $214,000|
|Individuals with a MAGI of $107,000 up to $160,000||Standard premium + $104.90||Your plan premium + $31.80|
|Married couples with a MAGI of $214,000 up to $320,000|
|Individuals with a MAGI of $160,000 up to $214,000||Standard premium + $167.80||Your plan premium + $51.30|
|Married couples with a MAGI of $320,000 up to $428,000|
|Individuals with a MAGI above $214,000||Standard premium + $230.80||Your plan premium + $70.80|
|Married couples with a MAGI above $428,000|
If you’re married filing separately click here for surcharge tables: http://www.ssa.gov/pubs/EN-05-10536.pdf
Click here to untangle the ABC’s and Part D of Medicare and understand what each part covers.
Medicare’s premiums typically only cover 25% of the actual costs. The IRMAA surcharge amounts were created so that those who earn more would cover a higher percentage. At the top, those couples reporting a MAGI of at least $428,000 pay 80% of the actual costs. Most of these high-income earners will more than pay the rest of this bill when they pay their taxes.
Your premiums are usually based on income from 2 years prior. This means 2015 premiums are set by 2013 tax returns. However, it could be based on your 2012 tax return if you typically file a late extension.
Medicare performs this look back each year to set your premiums but if your income has dropped you into a lower tier, you’ll want to speed up the process. For example, if you’ve just retired, you’ll need to file a petition to get your monthly payments reduced. Remember to include documentation confirming your retirement with you and a paystub or recent W-2 so they know how much income you’ve lost. You can also appeal your premiums if you’ve experienced a life changing event such as a divorce, bankruptcy or other financial disaster. You’ll need to fill out Form SSA-44 but I also recommend that you schedule a visit to your local Social Security office to make sure the paperwork is in good order.
Roth Conversion Impact on Medicare Premiums
Roth conversions are a very powerful financial planning strategy and the benefits often outweigh the costs. However, you should be careful if a conversion takes your MAGI just over one of the Medicare premium threshold levels.
For example, consider a joint taxpayer with a MAGI of $210,000 who is considering a $20,000 Roth conversion to take them to the top of the 28% marginal tax bracket. When you factor in Medicare premiums, the calculus is less convincing. A $230,000 MAGI requires an additional annual premium of $988.80 for Part B & D when compared to their pre-conversion MAGI. This equates to an additional 5% tax on the conversion on top of the usual state and federal taxes.
As I mentioned earlier, the kicker in this deal is that you don’t pay the extra Medicare surcharge in the year you are converting. You get a letter in the mail saying that your monthly premiums are spiking two years later – by which time you’ve probably forgotten about the benefits of your conversion.
Large capital gains from the sale of stock, real estate or collectibles can also spike your MAGI into needing to pay for Medicare premium surcharges in future years. In each of these examples, it may be better to spread out your additional income over several years and stay below the new surcharge threshold. Whether converting to a Roth or realizing a gain, it pays to count the cost ahead of time.
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